Small business tax avoidance is growing – and it endangers the tax morale of the entire country
On 30 June, I gave evidence to the Treasury Select Committee on tax and duty non-compliance on high streets. The Committee was, rightly, concerned. So am I — and have been for a long time.
Walk down almost any high street in Britain, and you will see it. The vape outlets, the candy stores, the souvenir shops. Businesses that spring up, pull in revenue for a year or two, then fold to evade debts and taxes - only to reopen under a different company name, but with the same people selling the same thing. This is phoenixism, and HMRC puts its cost at £910mn in 2022-23 alone. The wider picture is starker still: the UK's tax gap has leapt to a record £59.2bn a year, and HMRC's own analysis shows small businesses are responsible for 62% of it. The government concedes that between 5% and 20% of the companies on our company register may be fraudulent - and this is three years after the passage of the Economic Crime and Corporate Transparency Act!
Since the Committee hearing, there has been a flurry of announcements — many genuinely progressive, and which recognise the seriousness of the situation. HMRC's annual report reveals directors made jointly and severally liable for £97.7mn of company tax debts, and a record £7.3bn recovered from investigations into small businesses and individuals. Legislation Day brought a new draft law proposing a statutory duty on taxpayers to correct known errors, backed by new Customer Correction Notices — a direct response to the £30bn of the tax gap attributed to "carelessness" and "error", and something we applaud. And the new Prime Minister's business rates package for pubs and music venues will be funded partly by reviewing reliefs for vape shops and cracking down on non-compliant online marketplace sellers.
The direction of travel is right. But criminal prosecutions for tax evasion have now fallen for a third successive year — and have tumbled from 749 in 2018-19 to just 300 in 2025-26. Compliance checks fell again too. Enforcement is shrinking while the tax gap balloons. Five reforms would change the equation.
First, raise the cost of opening — and closing — a company. The UK register remains the most bloated in the world: 5.5mn companies, with 815,000 new incorporations last year policed by a Companies House of just 2,400 staff. Incorporation costs £100; dissolution was actually cut in February to £13. Born for £100, buried for £13 — the full lifecycle costs about the same as a parking fine. Fees should rise to at least £250 to incorporate, dissolution fees should increase substantially, and final accounts should be required before any strike-off — so that a company's income, and any taxes owed, cannot simply vanish along with the company itself. With all extra monies raised ploughed back into Companies House.
Second, every business should publish its profit and loss account — no exceptions. Small companies can still file accounts revealing nothing of their income, profits or taxes, despite being responsible for the majority of the tax gap. The reinstated April 2028 filing reforms are welcome, but the newly added opt-out from public disclosure guts them. Transparency that can be opted out of is not transparency. Fair Tax Mark certified businesses have been happily disclosing such information for a decade.
Third, stop leaning on ineffective director bans as the primary sanction. Disqualification is pitifully weak — a banned director simply fronts the next company through a relative or friend — and sends a signal that robbing the public purse is akin to dropping litter. Problematic directors should instead be made personally liable for the taxes of their company, with Personal Liability Notices and Joint and Several Liability Notices deployed far more frequently. Last year's £97.7mn is a start, but modest against a £900mn phoenixism problem.
Fourth, remove the de minimis customs exemption faster. Small-value imports from China have ballooned — £5.9bn in 2024-25, up 53% in a year — yet goods under £135 still enter duty-free. With the US having acted in August 2025 and the EU moving in July, the UK's October 2028 date leaves it dangerously exposed as the last mover.
Fifth, extend online marketplace rules so all sellers comply with UK VAT. Overseas fraudsters routinely dupe platforms into treating them as UK-established, pocketing a 20% price advantage over compliant businesses. The live consultation on making marketplaces account for VAT on all sales they facilitate deserves full-throated support — and swift legislation.
The tools exist. The announcements are flowing. What is needed now is resolve to match a growing problem. Because the tax system relies on the fact that most of us happily (or at least grumpily) pay our taxes on the basis that others do so. If we allow in-your-face tax avoidance to brazenly thrive on our high streets, then we endanger the tax morale of the entire country.
Paul was a co-founder of the Fair Tax Foundation in 2014, and became Chief Executive in September 2017. International Tax Review named him among its ‘Global Tax 50' of influencers in 2022 and 2025.
